Options When Paying Your Taxes

You’ve probably read a lot about tax strategies and how to lower your tax bill, but how well do you know the actual process of filing? A professional tax preparer can take care of a lot for you, but they can’t actually file your taxes or send in your payment. Review your options before filing this year, and learn what to do if you can’t pay on time.

How to Pay

If you can afford to pay the taxes you owe on time, there are a number of payment options available to you. The IRS would prefer that you pay electronically to streamline the process, but you can also pay with a personal check, cashier’s check, money order, credit card or even cash.

Electronically: When you file electronically, you’ll get an automatic electronic confirmation that the IRS has received your return. You can also pay electronically using the Electronic Federal Tax Payment System. Filing electronically is the default for professional tax preparers. If you’re filing on your own and have less than $64,000 in income (for the 2016 filing season), you can use the IRS’s free tax software called FreeFile, which allows you the ease of electronic filing. This payment and filing method is easier for the IRS, but it can also benefit you if you’re expecting a refund, because it’s faster than other methods.
Check, cashier’s check or money order: The IRS also accepts these methods of payment, whether you file electronically or via the mail. Checks need to be payable to U. S. Treasury and include your social security number or employer identification number.
Credit card: If you don’t currently have the money to pay your taxes, it may be worth it to pay them with your credit card, but only if your card’s interest rate is less than the interest and fees that would be charged by the IRS. However, you’ll face a convenience fee (usually from 1–3 percent) for using your card (unless your bank covers it for you), so it’s probably not the best option if you can afford to pay now.
Cash: The IRS does not permit cash payments to be sent through the mail. If you’d like to pay with cash, you’ll have to drop it off in person at a local IRS office. Not all offices will accept cash, so check the IRS website to make sure.

Whichever method you choose, you should include Form 1040-V with your return, which is a payment voucher that helps the IRS process returns. It’s not required, but it can help speed up the process.

If You Can’t Pay

Should You Still File?

Even if you know you can’t pay the taxes you owe, you should still file on time. The penalty for late filing is worse than the penalty for late payment, and the IRS tends to be more forgiving to those who have always filed on time. If you file but can’t pay on time, the penalties are 0.5 percent per month, up to 25 percent after 50 months, plus interest. If you fail to file by the deadline, the penalty can be up to 5 percent per month that your return is late, up to 25 percent after five months, in addition to the late payment fees and interest. Filing on time not only saves you in fees, but will also prevent criminal charges.

Borrow the Money

If you can obtain a loan from the bank or a friend, or if you can pay with your credit card or through a home equity loan, this may be better for you in the end than paying the IRS’s fees and interest. You’ll have to compare the loan or credit’s interest rate with the IRS fees to determine if it’s better to borrow the money and pay on time.

Installment Plans

An installment plan is a way of paying your tax liability over a period of time (typically 60 months or less) in installments, with lowered fees than if you had not set up a plan with the IRS. The IRS should grant you an installment plan if you owe $50,000 or less. If you owe more, you may have to do some negotiating.

Extensions

If you can’t file on time, you can easily request a 60-day filing extension. This will exempt you from late filing fees, but you’ll still owe late payment fees and interest until your balance is paid. To get an extension, fill out Form 4868, Application for Automatic Extension of Time to File.

You can also get a payment extension to eliminate or decrease late payment fees. An Undue Hardship Extension allows you to pay up to 6 months late without paying any penalties. However, you’ll have to prove that paying your taxes on time would cause you undue hardship (such as having to sell your home), and you’ll still accrue interest during this time.

Offer in Compromise

Similar to the Undue Hardship Extension, an offer in compromise will alleviate some of the burden of taxes that you are unable to pay. Depending on your financial circumstances, the IRS may be willing to forgive as much as 99 percent of your tax debt. The amount you must pay in an offer in compromise is what the IRS would reasonably expect to collect from you, given your income and assets. The IRS will only consider an offer in compromise if it is clear you cannot afford to pay all your taxes in a reasonable amount of time. To begin the process, you must file Form 656and pay a filing fee.

No matter how high your tax bill is or how dire your financial situation may be, the worst thing you can do is ignore the problem. The IRS will contact you and demand payment if you don’t file on time, so putting it out of your mind won’t help. Instead, determine the best way to minimize fees and choose the payment method that is most convenient for you.

* Investment Advisory Services are offered through Capitol Private Wealth Group, a registered investment adviser.*